Lack of consumer spending is not cause of economic woes

By David Moon, Moon Capital Management
January 27, 2008


The president finally announced his plan to solve our country's economic woes. He wants to send everyone a check for $800.

The fear I hear most frequently expressed, however, is that some Americans might simply use the money to pay down debt, thereby depriving our economy of a much-needed consumer boost.

For the sake of our country, our economy and our citizens, we should hope that this plan goes back onto some third grader's Christmas wish list, because that's where it sounds like it originated.

It amazes me that politicians are concerned that taxpayers might take their newfound $800 windfall and waste it on something silly, like reducing debt. If you think clearly, unlike a politician, it might occur to you that one of our problems might be an excess of debt ' say subprime mortgage debt.

Where do you think the federal government will get the $800? It will have to borrow it. If you take your $800 and buy a TV set or a vacation, you ' the taxpayer ' will be paying for that vacation for the next 30 years.

If you pay off some debt with it, however, you will at least be swapping debt for debt.

Do you think a lack of consumer spending got us into this mess?

Hardly.

The definition of a recession is two consecutive quarters of negative economic growth. ('Negative economic growth' is one of those weird oxymorons, like 'fire department' or 'jumbo shrimp.') If we're slipping into a recession ' and we probably are ' it's certainly not from a lack of shopping effort by the consumer. We've been spending more than we make since the beginning of 2006. Homeowners have been using lines of credit to take cash out of their houses so they could go to restaurants.

Spending more money won't solve the problem; spending money like a rebellious teenager with a stolen credit card caused the excesses in the first place.

Imagine for a moment that you have an upcoming appointment with your doctor for a physical. You're 25 pounds overweight. You're always overweight. In fact, you're fatter now than you've ever been. Every time you see the doctor, he encourages you to lose the weight, citing the eventual blood pressure, heart and insulin problems that could result from your condition.

You have only two weeks until the appointment. If you start exercising and eating right now, it won't make a dent in your weight or your overall health in this short a period. So you go on a crash diet. You drink tea and sit in a steam room for 14 days. You take diuretics. You get a haircut and rid yourself of anything else that might add unwanted gravitational pull on the doctor's scales.

In two weeks you lose the 25 pounds.

Within ten days, you gain it all back. Plus a couple more.

You may have given the impression of health, but by making a 50-pound round trip in less than a month, you put your body in even more danger. You have weight problems because you don't treat your body properly. So how do you address it?

By abusing your body even more.

That is the Bush economic bailout plan.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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